Expo 2020 Helps JAFZA Sukuk Outpace Gulf

Jebel Ali Free Zone FZE’s Islamic bond returned more than four-times the Arabian Gulf average this quarter amid bets the Dubai business-park operator will be upgraded after the emirate was picked to host Expo 2020.

Sukuk from the company known as Jafza earned 4.3 per cent since September 30, the best-performing Shariah-compliant debt in the Gulf Cooperation Council, according to data compiled by Bloomberg. That compares with a regional average return of 0.9 per cent in the period.

“There’s a good chance that Jafza, among other Dubai names, will be upgraded next year,” Apostolos Bantis, a London- based credit analyst at Commerzbank AG, said by phone December 9. “The Dubai Expo win will promote a need for more facilities, so Jafza will grow its operation.”

Dubai, home to the biggest port between Rotterdam and Singapore, will spend $8.1 billion on roads, an airport, hotels and an extension to its rail network in preparation for the 2020 world fair, which will take place near the business park. Jafza was raised to two steps below investment grade in October by Moody’s Investors Service, which cited progress in reducing debt. Fitch Ratings affirmed the company’s junk B+ rank in July.

Jafza’s bond was caught up in an emerging market sell-off in September amid investor expectations the U.S. Federal Reserve would reduce $85 billion a month of bond purchases. The price fell to 107.04 cents on the dollar on September 9 from a record 116.63 on January 11, before recovering to 113.28 yesterday.

“The September period was a one-off,” Aliasgar Tambawala, the Dubai-based manager of fixed income at Mashreq Capital DIFC Ltd., said by phone December 9. “The price was low because of the market and the outlook for rates. Next year this will become five-year paper, then it will be in every investor’s sweet spot.”

The yield on the $650 million of seven per cent notes due June 2019 has tumbled 73 basis points this quarter to 4.27 per cent yesterday, according to data compiled by Bloomberg. The average yield for sukuk from companies in the GCC fell 10 basis points to 4.4 per cent on December 9, according to HSBC/Nasdaq Dubai indexes.

Volatility caused by the Fed’s stimulus tapering plan is the only threat to the sukuk’s rally, Bantis said. “Even these Dubai credits, which have been a bit more resilient, would be affected,” Bantis said.

The Fed pledged to buy bonds until the outlook for the U.S. labor market improves substantially. A government report on December 6 showed back-to-back monthly payroll gains of at least 200,000 for the first time in almost a year. A third of economists surveyed by Bloomberg think bond purchases will be pared at the Fed’s December 17-18 meeting.

Moody’s upgraded Jafza to Ba2, citing the company’s financial metrics and ratio of debt to Ebitda, or earnings before interest, taxes, depreciation and amortization. The latter fell to less than four times from five-and-a-half times a year earlier, Moody’s said.

Dubai’s non-oil foreign trade rose 10 per cent to more than Dhs1 trillion ($272 billion) in the first nine months of of 2013 compared with a year earlier. The Middle East business hub, which was awarded the right to host the 2020 world fair on November 27, plans to attract 25 million visitors during the six-month long event.

“The Dubai outlook is positive and that translates right into Jafza,” Tambawala said. “Any rating action is going to be supportive.”